18 December 2017

Financial Times: The real price of Brexit begins to emerge

[...]According to economists such as Robert Chote, chairman of the independent Office for Budget Responsibility, which produces the official government forecasts, a more pressing question is to assess the impact compared with what would have happened had the vote gone the other way. “Many PhDs are going to be written on the impact of Brexit over the years to come,” he says.

This work has started, and includes a range of estimates calculated by the Financial Times suggesting that the value of Britain’s output is now around 0.9 per cent lower than was possible if the country had voted to stay in the EU. That equates to almost exactly £350m a week lost to the British economy — an irony that will not be lost on those who may have backed Leave because of the claim made on the side of the bus.

Jonathan Portes, professor of economics and public policy at King’s College London and one of the academics leading publicly funded research into the effects of Brexit, says: “The conclusion that, very roughly, Brexit has already reduced UK growth by 1 per cent or slightly less seems clear.”

Companies are becoming more vocal over the economic hit, blaming the government’s slow handling of the Brexit negotiations for a weaker business climate. In October, the International Monetary Fund highlighted Britain as a “notable exception” to an improving global economic outlook, while the OECD, the Paris-based club of mostly rich nations, has raised concerns about “the ongoing slowdown in the economy induced by Brexit”.

Thomas Sampson and colleagues at the London School of Economics have examined the direct effect of sterling’s depreciation since the EU referendum on prices and living standards. With the pound falling about 10 per cent following the June 2016 result, inflation has risen more in Britain than in other advanced economies. It started with petrol prices and spread to food and other goods, pushing overall inflation up from 0.4 per cent at the time of the referendum to 3.1 per cent last month.

When looking at prices, depending on the level of import exposure of different goods and services, the LSE study estimates that the Brexit vote directly increased inflation by 1.7 percentage points of the 2.7 percentage-point rise in the 12 months after the referendum. And with wage inflation stuck at just over 2 per cent, “the increase in inflation caused by the Leave vote has already hurt UK households”, Mr Sampson says.

He calculates that “the Brexit vote has cost the average worker almost one week’s wages”, but adds the figure could be higher or lower if a complete evaluation of the economic impact was applied rather than just the initial squeeze on incomes from leaving the EU.

Other effects are more apparent. Business investment grew at an annual rate of 1.3 per cent in the third quarter, compared with a March 2016 official forecast for annual growth of 6.1 per cent for the whole of 2017. Exports, boosted by sterling’s depreciation, have proved more resilient. The OBR now expects a 5.2 per cent rise in the volume of goods and services sold abroad in 2017 compared with a pre-referendum prediction of 2.7 per cent.

Net migration to the UK from the EU fell by 40 per cent in the first 12 months after the vote. Professor Portes last year predicted an ultimate decline of between 50 and 85 per cent on net migration levels before the referendum. “Arithmetically, this reduction [of 40 per cent] of net EU migration translates into a reduction in growth of 0.1 to 0.2 per cent,” he says. Economists working to estimate the overall Brexit impact on the economy need to build a counterfactual scenario — an imagined world in which Britain had voted to remain in the EU — to compare that with Britain’s economic performance since the vote. The counterfactual cannot be known for certain but it is possible to take a number of approaches, in three broad categories. [...]

Full article on Financial Times (subscriptionr equired)

© Financial Times